I want to take another look at Detroit's bear article on SA. For now, it's the best outline of the bear case that I can find. Yesterday, I listened again to the post-data CC of the company and I spoke with a key official of the company.
The real core of Detroit's thesis, as I understand it better, is that Olinvo is a ho-hum drug, even as it's likely to be approved. It's addictive, and doesn't offer a way out from the opiod probelms.
Detroit comments that the advantage of Olinvo to morphine are limited, and the company's charts can misdirect on even the limited advantages.
TRVN's chances of being acquired plummeted as a result of the trial data. I agree with Detroit on this, as well.
One of the strengths of Trevena's trial approach, now that I've had it explained to me by the company and then re-listened to the call, is TRVN's going head to head vs morphine in the trial, and with varying dosage Olinvo dosage groups. This has never been done in a trial.
In effect, the company was positioning both to get FDA approval for all the dose levels, including the smallest, but also had an eye for the later marketing obstacles.
Of interesting note to me, is that morphine has never been studied for whether it's side effects diminish if the dosage is diminished. It's surprising -- as this is fundamental information the anesthesiologist would want to have. As morphine is generic, I guess there was never an economic incentive.
This results in Olinvo having side effect dosage data, which provides the anesthesiologist with a wider strategic approach to adjust and tailor pain management. Even though the lowest dose does least to impact pain, the anesthesiologist now can know that this lowest dose also has lower side effects, whereas the middle dose has the same side effects as the highest dose.
In every measurable way, Olinvo is at least equal to morphine, for nearly every patient, it has some advantages. In most cases -- in most patients -- these advantages are negligible, but they exist.
The market share issue, at least as compared to use of morphine, relates to how the hospital and insurer want to regulate the adoption of Olinvo. Otherwise, I could see the anesthesiologist using it frequently, simply because it's always at least slightly better than morphine.
One of the topics covered in the data CC is that the company is likely to do additional studies in order to provide the clinician with additional usage information. In other words, marketing studies -- providing the clinician with guidance on those situations where Olinvo has a data-proven advantage.
I think we'll see a lot of competition entering the field. CARA is likely to be in the market, and there are likely others. Opiate addition is a crisis, and there are likely many pain-reduction compounds yet to be discovered and tested.
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Now that we have trial data, and likely FDA approval, the market is having to put a market value to a revenue stream that won't start until 2H of 2018. In order to even tap that revenue stream, the company has to spend a lot of cash -- $25M per quarter perhaps -- for the unknown, and moderate revenue stream.
When I look at last week's trading, anyone holding shares would have wanted to sell at the pre-data $7 if they could. The risk at that market level of having to wait for almost two years before we even have revenue to report on a CC, and run through another $200M, is a lot for a shareholder to bear at the then- net-of-cash $285M market valiue.
However, the market didn't let anyone sell their shares for $7. It priced them at $5 right after data, and then most sales at the $4 level. Our share price, then, has been set by the most desperate of the sellers -- those willing to take $4 to escape.
Logically, there's a limit to how many of these sellers there are. The issue, then is whether the price we settle at is $4 or how much above $4. After all, if I buy at $4, and the price goes up, it's a successful trade for me. Whether I continue to hold to see if the price continues to go higher is a decision I can re-examine each day.
In terms of betting on the 2019 revenue stream, the company does seem fairly valued and Detroit may be right that $3 or lower is a more appropriate valuation, though I disagree. Coming up with that additional $200M in cash before we see any revenues show up on a CC report will create vast dilution, and the complications of putting together a sales force and convince insurers and hospitals to write relaxed guidelines to the frequency use of Olinvo will be a challenge.
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This is why the acquisition issue is so fundamental. Olinvo could be licensed to every global region. A BP can slash some overhead costs, as well as the market costs. The cash cost to a BP is negligible because they are using internal cash flow this year to generate more internal cash flow next year. There's no capital loss risk -- simply deferring some profits this year in order to get higher profits next year. That cost of capital is very different from TRVN having to go to the markets and massively dilute it's shareholders.
For the next two years, the risk-of-dilution vs the gain of acquisition is the investment thesis calculus, in my view. With no revenue to report, the only way for an investor to make money is to guess either that someone else will pay a higher current share price for the future cash flow in 2019 and beyond or the company will be acquired by the BP which can pay now for this future cash flow much more efficiently than the public market can.
For this reason, even the analysts' Buy recommendations seem a bit flimsy to me -- they are guessing, in effect, on the likelihood of a buyout, because they are as in the dark as us all as to the share price after the company diluted by another $200M.
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The CEO of the company does not strike me as someone who particularly wants to lead a small biotech with a small revenue single compound for the next era of her career. While the company can and perhaps will work on additional compounds, I don't think the company has any particular expertise advantage. They've worked on a single compound strategy, and it is successful enough to be FDA and perhaps globally approved. From here, the core mission of the company is more studies; marketing; optimizing market share.
I think we are living through the investor population adjustment from those who were betting $7 to make $70, and now the market is looking for investors willing to bet less and get a lot less -- in addition now to a massive dilution risk that did not exist at $7 (when a likely acquisition would have awaited ultra-positive trial data.)
I will continue to hold and may add on weakness.
